UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2004
Commission file number: 1-12162
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act).
YES X NO ___
On June 30, 2004 the registrant had 55,813,678 shares of Common Stock
outstanding.
-------------
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2004
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
June 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Operations (Unaudited) for
the three months ended June 30, 2004 and 2003 4
Consolidated Statements of Operations (Unaudited) for
the six months ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows (Unaudited) for
The six months ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 22
Item 4. Controls and Procedures 22
PART II. Other Information
Item 1. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 23
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BorgWarner Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner Inc. and Consolidated Subsidiaries (the
"Company") have been prepared in accordance with the instructions to Form 10-Q
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
statements are unaudited but include all adjustments, consisting only of
recurring items, except as noted, which the Company considers necessary for a
fair presentation of the information set forth herein. Certain prior period
amounts have been reclassified to conform to current period presentation. The
results of operations for the three and six months ended June 30, 2004 are not
necessarily indicative of the results to be expected for the entire year. The
following financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003.
This Form 10-Q/A has been filed for the sole purpose of correcting a
typographical error. On page 3, in the Condensed Consolidated Balance
Sheets, the caption "Investments and advances" is $176.9 million.
In the Form 10-Q filed on August 6, 2004, a typographical error
caused the amount to be reported as 76.9 million.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
June 30, December 31,
2004 2003
-------- -------
ASSETS (Unaudited)
Cash and cash equivalents $ 144.0 $ 113.1
Receivables 491.2 414.9
Inventories 215.6 201.3
Deferred income taxes 32.9 32.8
Investments in businesses held
for sale 39.6 32.0
Prepayments and other current
assets 39.6 30.5
-------- --------
Total current assets 962.9 824.6
Property, plant, and equipment
at cost 1,720.8 1,665.7
Less accumulated depreciation (729.9) (680.4)
--------- ---------
Net property, plant and
equipment 990.9 985.3
Tooling, net of amortization 101.0 90.5
Investments and advances 176.9* 177.3
Goodwill 850.6 852.0
Other non-current assets 112.5 120.7
--------- ---------
Total other assets 1,241.0 1,240.5
--------- ---------
$ 3,194.8 $ 3,050.4
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable and current portion of
long-term debt $ 9.0 $ 10.0
Accounts payable and accrued
expenses 549.5 460.3
Income taxes payable 17.3 -
--------- ---------
Total current liabilities 575.8 470.3
Long-term debt 573.9 645.5
Long-term retirement-related
liabilities 461.4 503.0
Other long-term liabilities 184.7 154.0
--------- ---------
Total long-term liabilities 646.1 657.0
Minority interest in con-
solidated subsidiaries 17.4 17.2
Capital stock:
Preferred stock, $.01 par value;
authorized 5,000,000 shares;
none issued - -
Common stock, $.01 par value;
authorized 150,000,000 shares;
issued shares: 2004- 55,817,662;
2003- 55,229,854; outstanding
shares: 2004-55,813,678;2003-
55,157,190 0.6 0.3
Non-voting common stock, $.01 par
value; authorized 25,000,000
shares; none issued and
outstanding in 2004 - -
Capital in excess of par value 784.7 756.3
Retained earnings 582.9 491.3
Accumulated other comprehensive
income 13.5 4.0
Common stock held in treasury, at
cost: 2004, 3,984 shares; 2003,
72,664 shares (0.1) (1.5)
--------- ---------
Total stockholders' equity 1,381.6 1,260.4
--------- ---------
$3,194.8 $3,050.4
========== =========
*In the Company's Form 10-Q filed on August 6, 2004, a typographical
error resulted in this number being reported as 76.9 million.
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Three months ended
June 30,
2004 2003
------ -------
Net sales $893.2 $769.5
Cost of sales 723.4 622.8
------ -------
Gross profit 169.8 146.7
Selling, general and administrative
expenses 87.8 77.0
Other, net 0.6 0.1
------ -------
Operating income 81.4 69.6
Equity in affiliate earnings, net
of tax (8.4) (5.2)
Interest expense and finance charges 7.7 8.7
------- -------
Earnings before income taxes 82.1 66.1
Provision for income taxes 24.6 19.2
Minority interest, net of tax 2.8 2.1
------- -------
Net earnings $ 54.7 $ 44.8
======== ========
Net earnings per share - Basic $ 0.98 $ 0.83
======= ========
Net earnings per share Diluted $ 0.97 $ 0.83
======== ========
Average shares outstanding (thousands)
Basic 55,766 53,670
Diluted56,38354,216
Dividends declared per share $ 0.125 $ 0.09
======== ========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Six months ended
June 30,
2004 2003
--------- ---------
Net sales $1,796.2 $1,545.2
Cost of sales 1,453.9 1,246.9
--------- ---------
Gross profit 342.3 298.3
Selling, general and admini-
strative expenses 182.5 160.7
Other, net 0.9 0.1
--------- ---------
Operating income 158.9 137.5
Equity in affiliate earnings,
net of tax (14.9) (11.6)
Interest expense and finance charges 15.2 17.7
--------- ---------
Earnings before income taxes 158.6 131.4
Provision for income taxes 47.5 38.1
Minority interest, net of tax 5.3 4.3
--------- ---------
Net earnings $ 105.8 $ 89.0
========= ==========
Net earnings per share - Basic $ 1.90 $ 1.66
Net earnings per share Diluted $ 1.88 $ 1.65
Average shares outstanding (thousands)
Basic 55,591 53,488
Diluted 56,219 53,944
Dividends declared per share $ 0.25 $ 0.18
========= =========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Six months ended
June 30,
2004 2003
-------- ---------
Operating
Net earnings $ 105.8 $ 89.0
Non-cash charges to operations:
Depreciation 67.3 60.2
Amortization of tooling 19.9 15.7
Employee retirement benefits 24.5 6.8
Equity in affiliate earnings, net
of dividends received,
minority interest and other 8.0 (0.3)
--------- ----------
Net earnings adjusted for non-cash
charges 225.5 171.4
Changes in assets and liabilities:
Increase in receivables (81.3) (61.2)
Increase in inventories (16.1) (6.9)
Increase in prepayments and other
current assets (10.2) (2.1)
Increase in accounts payable and
accrued expenses 92.6 6.7
Increase in income taxes payable 17.0 16.1
Net change in other long-term assets
and liabilities (6.0) 31.3
--------- ---------
Net cash provided by
operating activities 221.5 155.3
Investing
Capital expenditures (84.2) (64.8)
Tooling outlays, net of customer
reimbursements (30.1) (20.7)
Net proceeds from asset disposals 2.5 1.3
Investment in unconsolidated subsidiary (9.0) (12.8)
---------- -------
Net cash used in investing activities(120.8) (97.0)
Financing
Net decrease in notes payable (0.8) (3.6)
Additions to long-term debt 1.2 0.4
Reductions in long-term debt (59.2) (7.1)
Payments for purchases of treasury stock - (2.5)
Proceeds from stock options exercised 3.2 0.8
Dividends paid (13.9) (9.6)
---------- ------
Net cash used in financing activities (69.5) (21.6)
Effect of exchange rate changes on cash
and cash equivalents (0.3) 0.1
---------- ------
Net increase in cash and cash equivalents 30.9 36.8
Cash and cash equivalents at beginning
of period 113.1 36.6
--------- ---------
Cash and cash equivalents at end
of period $ 144.0 $ 73.4
============ ==========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 15.6 $ 18.3
Income taxes 3.0 11.3
Non-cash financing transactions:
Issuance of common stock for Executive Stock
Performance Plan 2.0 3.3
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Research and development costs charged to expense for the three and six
months ended June 30, 2004 were $30.8 million and $60.4 million. Research and
development costs charged to expense for the three and six months ended June 30,
2003 were $28.9 million and $58.4 million.
(2) Inventories consisted of the following (millions of dollars):
June 30, December 31,
2004 2003
--------- ---------
Raw materials $ 88.6 $ 95.5
Work in progress 86.0 65.1
Finished goods 41.0 40.7
-------- -------
Total inventories $215.6 $201.3
======== =======
(3) The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in net
income for stock options, as all options granted under those plans had an
exercise price equal to or in excess of the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value
recognition provision of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," to all stock-based employee
compensation awards.
Three Months Ended June 30,
2004 2003
----------- -------------
Net earnings, as reported $ 54.7 $ 44.8
Add:
Stock-based employee
compensation expense
included in net income,
net of income tax
0.3 1.5
Deduct:
Total stock-based employee
compensation expense deter-
mined under fair value
based methods for all awards,
net of tax effects (1.7) (2.5)
------- ---------
Pro forma net earnings $53.3 $43.8
========= =========
Net earnings per share
Basic as reported $ 0.98 $ 0.83
Basic pro forma 0.95 0.82
Diluted as reported 0.97 0.83
Diluted pro forma 0.94 0.81
Six Months Ended June 30,
2004 2003
----------- ------------
Net earnings, as reported $105.8 $89.0
Add:
Stock-based employee
compensation expense
included in net income,
net of income tax 0.7 2.6
Deduct:
Total stock-based employee
compensation expense deter-
mined under fair value
based methods for all
awards, net of tax effects (2.9) (4.7)
------- -------
Pro forma net earnings $103.6 $86.9
======= =======
Net earnings per share
Basic as reported $ 1.90 $ 1.66
Basic pro forma 1.86 1.62
Diluted as reported 1.88 1.65
Diluted pro forma 1.84 1.61
On May 17, 2004 the Company announced a two-for-one stock split of common stock
for stockholders of record on May 3, 2004. All share and per share amounts for
prior periods were restated to account for the effect of the stock split.
In calculating earnings per share, earnings are the same for the basic and
diluted calculations. Shares increased for diluted earnings per share by
617,000 and 546,000 for the three months ended, and 628,000 and 456,000 for the
six months ended June 30, 2004 and 2003, respectively, due to the effects of
stock options and shares issuable under the executive stock performance plan.
(4) The Company's provision for income taxes is based upon estimated annual tax
rates for the year applied to federal, state and foreign income. The effective
rate for 2004 differed from the U.S. statutory rate primarily due to a) state
income taxes, b) foreign rates which differ from those in the U.S. and c)
realization of certain business tax credits, including foreign tax credits and
research and development credits. The Company expects its effective tax rate for
2004 to be approximately 30.0%. This rate is about 1.5% higher than the full
prior year due to changes in tax laws in some of the countries where the Company
does business.
(5) Following is a summary of notes payable and long-term debt:
June 30, 2004 December 31,2003
Current Long-Term Current Long-Term
---------- ------- -------- -----------
DEBT (millions of dollars)
Bank borrowings and other $ 2.2 $ 2.9 $ 17.8 $ 42.5
Term loans due through 2011
(at an average rate of 3.3% at
June 30, 2004 and 3.4% at
December 31, 2003) 6.8 27.3 7.1 31.4
7% Senior Notes due 2006,
net of unamortized discount
($139 million converted to floating
rate of 3.6% by interest rate swap
at June 30, 2004) - 139.0 - 139.4
6.5% Senior Notes due 2009,
net of unamortized discount
($100 million converted to floating
rate of 4.3% by interest rate swap
at June 30, 2004) - 136.3 - 164.7
8% Senior Notes due 2019,
net of unamortized discount($75
million converted to floating
rate of 4.5% by interest rate
swap at June 30, 2004) - 133.8 - 133.9
7.125% Senior Notes due 2029,
net of unamortized discount - 119.1 - 122.1
-------- -------- ------ -------
Carrying amount of notes
payable and long-term debt 9.0 573.3 10.0 634.0
Fair value adjustment for interest
rate swaps (a) - 0.6 - 11.5
-------- ------- ------- -------
Total notes payable and
long-term debt $ 9.0 $ 573.9 $ 10.0 $ 645.5
======= ======= ======== =======
(a) The fair value adjustment for interest rate swaps has been reclassified to
long-term debt for all periods presented.
The Company has a new revolving credit facility that provides for
borrowings up to $600 million through July 2009. This new facility effective
July 22, 2004 replaced the Company's existing facility of $350 million. At June
30, 2004 and December 31, 2003, there were no borrowings outstanding and no
obligations under standby letters of credit under either facility. The lines of
credit are subject to the usual terms and conditions applied by banks to an
investment grade company. The Company is in compliance with its credit agreement
covenants as of June 30, 2004 and expects to be compliant in future periods.
(6) The Company has entered into interest rate and currency swaps to manage
interest rate and foreign currency risk. A summary of these instruments
outstanding at June 30, 2004 follows (currency in millions):
Notional Interest rates Floating interest
Hedge Type Amount Receive Pay Rate basis
---------- -------- -------- ------- ----------
Interest Rate Swaps (a) (Millions)
Fixed to floating Fair value $139 7.0% 3.6% 6 month LIBOR+1.7%
Fixed to floating Fair value $100 6.5% 4.3% 6 month LIBOR+2.4%
Fixed to floating Fair Value $ 75 8.0% 4.5% 6 month LIBOR+2.6%
Cross Currency Swap (matures in 2006)
Floating $ Investment $125 3.3% - 6 mo. USD LIBOR+1.4%
To floating Yen Yen 14,930 - 1.7% 6 mo. JPY LIBOR+1.7%
a) The maturity of the swaps corresponds with the maturity of the hedged
item as noted in the debt summary, unless otherwise indicated.
The ineffective portion of the swaps was not material. As of June 30, 2004
and December 31, 2003, the fair value of the fixed to floating interest rate
swaps was $0.6 and $11.5 million, respectively. The cross currency swaps were
recorded at their fair value of $(12.2) and $(13.6) million at June 30, 2004 and
December 31, 2003, respectively. Fair value is based on quoted market prices
for contracts with similar maturities.
The Company also entered into certain commodity derivative instruments to
protect against commodity price changes related to forecasted raw material and
supplies purchases. The primary purpose of the commodity price hedging
activities is to manage the volatility associated with these forecasted
purchases. The Company primarily utilizes forward and option contracts, which
are designated as cash flow hedges. These instruments are intended to offset
the effect of changes in commodity prices on forecasted purchases. As of June
30, 2004 the Company had forward and option commodity contracts with a notional
value of $1.9 million and an immaterial unfavorable fair value. At December 31,
2003, the Company had forward and option commodity contracts with a total
notional value of $1.1 million and a fair value of $0.1 million. During the six
months ended June 30, 2004 and 2003, hedge ineffectiveness of these contracts
was not material.
The Company uses foreign exchange forward contracts to hedge forecasted
future purchases of materials consumed in the production process, and the
receivables related to forecasted sales through the second quarter of 2009, and
are designated as cash flow hedges. Foreign currency contracts require the
Company, at a future date, to either buy or sell foreign currency in exchange
for primarily U.S. Dollars, Euro, Japanese Yen and British Pounds Sterling.
Contracts outstanding as of June 30, 2004 will mature over the next 3 years and
had net sales contract notional amounts of $14.3 million and 68.8 million and
fair value of $4.1 million, which is deferred in other comprehensive income and
will be reclassified and matched into income as the underlying operating
transactions are realized. Contracts outstanding as of December 31, 2003 had
contract notional amounts of $21.9 million and 3.0 million and a fair value of
$1.1 million.
(7) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency (EPA) and certain state
environmental agencies and private parties as potentially responsible parties
(PRPs) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (Superfund) and
equivalent state laws and, as such, may presently be liable for the cost of
clean-up and other remedial activities at 41 such sites. Responsibility for
clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.
Based on the information available to the Company, which in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large solvent public companies, will fully pay
the cost apportioned to them; currently available information from PRPs and/or
federal or state environmental agencies concerning the scope of contamination
and estimated remediation costs; remediation alternatives; estimated legal fees;
and other factors, the Company has established a reserve for indicated
environmental liabilities with a balance at June 30, 2004 of approximately $20.4
million. The Company expects this amount to be expended over the next three to
five years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company
agreed to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of
Environmental Quality, the EPA and Kuhlman Electric to investigate the extent of
and remediate the contamination. The investigation revealed the presence of
Polychlorinated Biphenyls (PCBs) in portions of the soil at the plant and
neighboring areas. Clean up began in 2000 and is continuing. Kuhlman Electric
and others, including the Company, have been sued in numerous related lawsuits,
which claim personal injury and property damage. The first of these lawsuits is
scheduled to go to trial in August 2004.
The Company believes that the reserve for environmental liabilities and any
insurance recoveries are adequate to cover any potential liability associated
with environmental matters. However, due to the nature of environmental
remediation, there can be no assurance that the actual amount of environmental
liabilities will not exceed the amount reserved.
The Company has guaranteed the residual values of certain leased machinery
and equipment at one of its facilities. The guarantees extend through the
maturity of the underlying lease, which is in 2005. In the event the Company
exercises its option not to purchase the machinery and equipment, the Company
has guaranteed a residual value of $16.3 million. The Company does not believe
it has any loss exposure due to this guarantee.
The Company entered into two separate royalty agreements with Honeywell
International for certain variable turbine geometry (VTG) turbochargers in order
to continue shipping to its OEM customers after a German court ruled in favor of
Honeywell in a patent infringement action. The two separate royalty agreements
were signed in July 2002 and June 2003, respectively. The July 2002 agreement
was effective immediately and expired in June 2003. The June 2003 agreement was
effective July 2003 and runs through 2006 and calls for a minimum royalty to be
paid over stated volume levels, meaning the royalty will increase for any units
sold above the stated amounts in the royalty agreement.
The royalty costs recognized under the agreements were $5.8 million in the
second quarter 2003 and $4.9 million in the second quarter 2004. These costs
were all recognized as part of cost of goods sold. These costs will continue to
decrease in 2004 and be at minimal levels in 2005 and 2006 as the Company's
primary customers have converted most of their requirements to the next
generation VTG turbocharger.
The Company provides warranties on some of its products. The warranty
terms are typically from one to three years. Provisions for estimated expenses
related to product warranty are made at the time products are sold. These
estimates are established using historical information about the nature,
frequency, and average cost of warranty claims. Management actively studies
trends of warranty claims and takes action to improve vehicle quality and
minimize warranty claims. Management believes that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is represented in
both long-term and short-term liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts
(in millions):
For the six months ended June 30, 2004
--------
Beginning balance $ 28.7
Provisions 3.9
Incurred (2.8)
-------
Ending balance $ 29.8
========
(8) Comprehensive income is a measurement of all changes in stockholders'
equity that result from transactions and other economic events other than
transactions with stockholders. For the Company, this includes foreign currency
translation adjustments, changes in the minimum pension liability adjustment,
market value changes in certain hedge instruments and net earnings. The amounts
presented as other comprehensive income, net of related taxes, are added to net
income resulting in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended June 30,
(in millions) Three Months Ended
2004 2003
--------- ----------
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
------ ------ ------ ------ ------ ------
Foreign currency
translation adjust-
ments $(15.5) $1.6 $(13.9) $50.0 $0.0 $50.0
Market value change
in hedge instruments (1.6) 0.0 (1.6) 0.0 0.0 0.0
Net earnings as
reported 54.7 44.8
------ ------
Total comprehensive income $ 39.2 $94.8
(in millions) Six Months Ended
2004 2003
---------- ------------
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
------ ------ ------ ------ ------ ------
Foreign currency
translation adjust-
ments $(7.5) $(0.8) $(8.3) $47.5 $0.0 $ 47.5
Market value change
in hedge
instruments 4.1 0.0 4.1 0.0 0.0 0.0
Net earnings as
reported 105.8 89.0
------- -------
Total comprehensive income $101.6 $136.5
====== =======
The components of accumulated other comprehensive income, net of tax, in
the Condensed Consolidated Balance Sheets are as follows:
(in millions) June 30, December 31,
2004 2003
Foreign currency translation adjustments $ 66.2 $ 74.5
Market value change in hedge instruments 4.1 0.0
Minimum pension liability adjustment (56.8) (60.5)
------- -------
Total accumulated other comprehensive income $ 13.5 $ 14.0
======= ========
(9) The following tables show net sales, earnings before interest and taxes
and total assets for the Company's reportable operating segments (in millions of
dollars).
Net Sales
Three Months Ended June 30,
2004 2003
Inter- Inter-
Customer segment Net Customer segment Net
------ ------ ------- ------- ----- -------
Drivetrain $347.4 $ - $347.4 $309.3 $ - $ 309.3
Engine 545.8 13.8 559.6 460.2 11.4 471.6
Inter-segment elimations - (13.8) (13.8) - (11.4) (11.4)
------- ------- ----- ----- ----- -----
Consolidated $893.2 $ - $893.2 $769.5 $ - $769.5
======== ======= ======= ====== ===== =======
Net Sales
Six Months Ended June 30,
2004 2003
Inter- Inter-
Customer segment Net Customer segment Net
------ ------ ------- ------- ----- -------
Drivetrain $707.0 $ - $707.0 $631.0 $ - $ 631.0
Engine 1,089.2 27.5 1,116.7 914.2 23.2 937.4
Inter-segment elimations - (27.5) (13.8) - (23.2) (23.2)
------- ------- ----- ----- ----- -----
Consolidated $1,796.2 $ - $1,796.2 $ 1,545.2 $ - $1,545.2
======== ======== ======== ======== ===== =======
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------- ------- ------- ------
Drivetrain $ 23.8 $ 23.7 $ 54.5 $ 49.8
Engine 75.7 60.5 143.7 121.2
------- ------- -------- --------
Total segments 99.5 84.2 198.2 171.0
Corporate, including
equity in affiliates (9.7) (9.4) (24.4) (21.9)
------- ------ -------- -------
Total $ 89.8 $ 74.8 $ 173.8 $149.1
======== ======== ========= ========
Total Assets
June 30, December 31
2004 2003
-------- ---------
Drivetrain $ 812.8 $ 778.8
Engine 2,028.4 1,925.1
--------- ----------
Total segments 2,841.2 2,703.9
Corporate, including
investment in affiliates 353.6 346.5
--------- ----------
Total $3,194.8 $3,050.4
========= ===========
(10) The Company securitizes and sells certain receivables through third
party financial institutions without recourse. The amount sold can vary each
month based on the amount of underlying receivables, up to a maximum of $50
million. During the six months ended June 30, 2004, the amount of receivables
sold remained constant at $50 million and total cash proceeds from sales of
accounts receivable were $300.0 million. For the six months ended June 30,
2004, the Company paid a servicing fee of $0.3 million related to these
receivables, which is included in interest expense and finance charges.
(11) The changes in the carrying amount of goodwill (in millions of
dollars) for the six months ended June 30, 2004, are as follows:
Drivetrain Engine Total
---------- ------- -------
Balance at December 31, 2003 $134.3 $717.7 $852.0
Translation adjustment (0.2) (1.2) (1.4)
------- ------ -------
Balance at June 30, 2004 $134.1 $716.5 $850.6
======= ====== ========
(12) The Company has a number of defined benefit pension plans and other
postretirement benefit plans covering eligible salaried and hourly employees.
The other postretirement benefits plans, which provide medical and life
insurance benefits, are unfunded plans. The estimated contributions for 2004
range from $32 to $35 million, of which about $32 million has been contributed
in the first half of the year. The components of net periodic benefit cost
recorded in the Company's Consolidated Statement of Operations, are as follows:
Other
Pension Postretirement
Benefits Benefits
Three months Ended June 30
2004 2003 2004 2003
------ ------ ------ ------
Service cost $ 3.2 $ 2.5 $ 1.7 $ 1.3
Interest cost 8.0 7.0 7.9 7.5
Expected return on plan assets (7.9) (6.6) - -
Amortization of unrecognized
transition asset 0.1 0.1 - -
Amortization of unrecognized
Prior service cost 0.3 0.3 - -
Amortization of unrecognized loss 2.1 2.4 2.9 1.5
------ ------ ------- -------
Net periodic benefit cost $ 5.8 $ 5.7 $12.5 $10.3
====== ====== ======= =======
Other
Pension Postretirement
Benefits Benefits
Six months Ended June 30
2004 2003 2004 2003
------ ------ ------ ------
Service cost $ 6.5 $ 5.0 $ 3.4 $ 2.6
Interest cost 16.1 14.0 15.8 14.9
Expected return on plan assets (15.8) (13.2) - -
Amortization of unrecognized
transition asset 0.2 0.2 - -
Amortization of unrecognized
Prior service cost 0.7 0.7 - -
Amortization of unrecognized loss 4.2 4.8 5.8 3.0
------- ------ ------- ------
Net periodic benefit cost $11.9 $ 11.5 $25.0 $20.5
======= ======= ======= =======
(13) In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51,"which was revised in December 2003.
FIN No. 46 requires that the assets, liabilities and results of the activity of
variable interest entities be consolidated into the financial statements of the
entity that has the controlling financial interest. FIN No. 46 also provides
the framework for determining whether a variable interest entity should be
consolidated based on voting interest or significant financial support provided
to it. For the Company, this Interpretation, as revised, was effective January
1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46, therefore, there was no impact
on our Consolidated Financial Statements.
In December 2003, the FASB issued a revised Statement of Financial
Accounting Standards, (SFAS) No. 132, "Employer's Disclosures About Pensions and
Other Postretirement Benefits." SFAS No. 132 changes employers' disclosures
about pension plans and other postretirement benefits and requires additional
disclosures about assets, obligations, cash flows and net periodic benefit
cost.
The Statement is effective for annual and interim periods ended after December
15, 2003. The Company adopted SFAS No. 132 as of December 31, 2003, resulting
in additional disclosures in the Company's annual and interim Consolidated
Financial Statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others", which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
45 requires the Company to recognize an initial liability for fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN No.
45 on January 1, 2003 did not have any impact on the Company's financial
position, operating results or liquidity and resulted in additional disclosures
in the Company's Consolidated Financial Statements.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was enacted in the United States. The Act
provides, among other things, expanded existing Medicare healthcare benefits to
include an outpatient prescription drug benefit to Medicare eligible residents
of the U.S. (Medicare Part D) beginning in 2006. Prescription drug coverage
will be available to eligible individuals who enroll under the Part D plan. As
an alternative, employers may provide drug coverage at least "actuarially
equivalent to standard coverage" and receive-free federal subsidy equal to 28%
of a portion of a Medicare beneficiary's drug costs for covered retirees who do
not enroll in a Part D plan.
In May 2004, the FASB issued Staff Position FAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," to provide guidance on accounting for effects of
the Act. The Staff Position requires treating the effect of the employer
subsidy on the accumulated post retirement benefit obligation (APBO) as an
actuarial gain. The effect of the subsidy is to be reflected in the estimate of
service cost in measuring the cost of benefits attributable to current service.
The effects of plan amendments adopted subsequent to the Act to qualify plans as
actuarially equivalent are to be treated as actuarial gains if the effect of the
amendments reduces the APBO. The net effect on the APBO of any plan amendments
that (a) reduce benefits under the plan and thus disqualify the benefits as
actuarially equivalent and (b) eliminate the subsidy are to be accounted for as
prior service cost.
The Company has deferred accounting for the effects of the Act pending an
assessment of the provisions of the Act on the Company's U.S.- based
postretirement healthcare plans; accordingly, the measures of the APBO and
expense recognized for the three months ended June 30, 2004 do not reflect any
amount associated with the subsidy. The Staff Position is effective for fiscal
periods beginning after June 15, 2004. The Company will record the effects of
the Act on the Company's U.S. based plans during the third quarter 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading
global supplier of highly engineered systems and components for vehicle
powertrain applications. Our products help improve vehicle performance, fuel
efficiency, handling, and air quality. They are manufactured and sold
worldwide, primarily to original equipment manufacturers (OEMs) of passenger
cars, sport utility vehicles, trucks, and commercial transportation products.
The Company operates manufacturing facilities serving customers in the Americas,
Europe and Asia, and is an original equipment supplier to every major OEM in the
world.
RESULTS OF OPERATIONS
The Company's products fall into two reportable operating segments: Drivetrain
and Engine. The following tables present net sales and earnings before interest
and taxes (EBIT) by segment for the three and six months ended June 30, 2004 and
2003 in millions of dollars.
Net Sales Three Months Six Months
June 30, June 30,
2004 2003 2004 2003
----- ----- ------- -----
Drivetrain $ 347.4 $ 309.3 $ 707.0 $ 631.0
Engine 559.6 471.6 1,116.7 937.4
Inter-segment
eliminations (13.8) (11.4) (27.5) (23.2)
------ ------ -------- -------
Net sales $ 893.2 $ 769.5 $1,796.2 $ 1,545.2
======= ========= ========= =========
EBIT Three Months Six Months
June 30, June 30,
2004 2003 2004 2003
------ ------ ------ -------
Drivetrain $ 23.8 $ 23.7 $ 54.5 $ 49.8
Engine 75.7 60.5 143.7 121.2
----- -------- ------- --------
Segment EBIT $ 99.5 $ 84.2 $ 198.2 $ 171.0
======= ======== ======== ========
Consolidated sales for the second quarter ended June 30, 2004 totaled
$893.2 million, a 16.1% increase over the second quarter of 2003. This increase
occurred in a market where production was up slightly from the previous year's
quarter. Production in North America and Europe was up approximately 1% and 3%
respectively. Sales increased $19.1 million due to stronger currencies,
primarily in Europe. Turbochargers and automatic transmissions are the products
most affected by currency fluctuations in Europe, Asia, and the Americas.
Without the currency impact, the increase in sales would have been 13.6%.
For the 2004 second quarter, the company reported net income of $54.7
million compared with $44.8 million from the prior year's second quarter, a
22.1% increase. The increase in income was due primarily from the profits on
the increased sales.
The Drivetrain business' sales increased 12.3% and EBIT increased $0.1
million, or 0.4% from 2003. The strong sales gain was a result of four-wheel
drive transfer case programs with General Motors and Ford, increased sales of
the Company's Interactive Torque Management (TM) all-wheel drive systems to
Honda and Hyundai, and steady demand for transmission components and systems,
especially with increased automatic transmission penetration in Europe. The
EBIT flatness was due to higher commodity prices including steel and rising
health care costs.
The Engine business' second quarter 2004 sales and EBIT increased 18.7% and
25.1% from second quarter 2003, respectively. This group benefited from
continued demand for the Company's turbochargers for European passenger cars and
commercial vehicles. Sales of timing chains increased as well, particularly to
our Asian customers. The EBIT increase was due primarily to the increase in
sales and improved productivity on the higher sales level.
Consolidated gross margin for the second quarter of 2004 was 19.0%,
compared to the 2003 margin of 19.1%. Gross margin was relatively flat. Higher
material prices for commodities, particularly steel, aluminum and copper and
health care costs were offset by cost reductions in our operations.
For the second quarter selling, general and administrative (SG&A) costs
increased $10.8 million, but decreased as a percentage of sales from 10.0% to
9.8% of sales. The increase in dollars was due to additional administration
needed to support the growth of the Company's various businesses. Spending on
research and development (R&D), which is included in SG&A, totaled $30.8
million, or 3.4% of sales versus $28.9 million, or 3.8% of sales for the second
quarter of 2003.
Second quarter interest expense decreased $1.0 million from second quarter
2003 as a result of reduced debt levels which more than offset interest rate
increases during the quarter. At June 30, 2004, the amount of net debt with
fixed interest rates was 51% of total net debt. Equity in affiliate earnings,
which consist primarily of the Company's 50% share of NSK-Warner in Japan, was
up $3.2 million. NSK-Warner realized both strong sales and profits in the second
quarter from its operations.
The Company's provision for income taxes is based on estimated annual tax
rates for the year applied to federal, state and foreign income. The effective
rate for 2004 differed from the U.S. statutory rate primarily due to a) state
income taxes, b) foreign rates which differ from those in the U.S. and c)
realization of certain business tax credits, including foreign tax credits and
research and development credits. The Company expects its effective tax rate for
2004 to be approximately 30.0%. This is a slight increase over last year due to
changes in tax laws in some of the countries where the Company does business.
Net income was $54.7 million for the second quarter, or $0.97 per diluted
share, an increase of $0.14 over the previous year's second quarter. The
increase from prior years second quarter was due to operations $0.15 per share,
favorable currency of $0.03 per share offset by a share dilution impact of
$(0.04) per share. Shares outstanding increased due to the exercise of options
and contributions to benefit plans.
For the remainder of 2004, the trends that are driving our growth are
expected to continue in the second half of the year. These trends include the
growth of diesel engines in Europe, the popularity of cross-over vehicles in
North America and the move to chain engine timing systems in both Europe and
Asia. The Company maintains a positive long-term outlook for its business and
is committed to ongoing strategic investments in capital and new product
development to enhance its product leadership strategy.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities increased from $155.3 million in 2003
to $221.5 million in 2004. The main factors were an increase in net income and
improved working capital management. The Company made a scheduled royalty
payment of $14.2 million in the first quarter of 2004. Dividend receipts, net of
withheld taxes from non-consolidated affiliates were $14.0 million in the first
six months of 2004 compared to $3.3 million for the first six months of 2003.
Capital spending for the six months was $84.2 million compared with $64.8
million last year. Careful capital spending remains an area of focus for the
Company, both in order to support new business and for cost reductions and
productivity improvements. The Company expects to spend $180 million - $190
million on capital in 2004, but this expectation is subject to ongoing review
based on market conditions.
As of June 30, 2004, debt decreased from year-end 2003 by $72.6 million, while
cash and cash equivalents increased by $30.9 million. The debt reduction
includes $58.8 million in principal payments, $11.0 million reduction in the
value of our interest rate swaps and $2.8 million in foreign exchange
translation adjustments. The Company paid dividends of $7.0 million and $4.8
million in the second quarter of 2004 and 2003, respectively.
As of June 30, 2004 and December 31, 2003, the Company had sold $50.0 million of
receivables under a Receivables Transfer Agreement for face value without
recourse.
From a credit quality perspective, we have an investment grade credit rating of
A- from Standard & Poor's and Baa2 from Moody's. The Standard & Poor's rating
was upgraded from BBB+ to A- on May 5, 2004. Moody's confirmed their rating on
April 22, 2004 and raised their outlook from stable to positive.
Effective July 22, 2004 the Company established a new credit facility that
provides for borrowings up to $600 million through July 2009. The new credit
facility replaced the Company's existing $350 million facility.
The Company believes that the combination of cash from operations and available
credit facilities will be sufficient to satisfy its cash needs for the current
level of operations and planned operations for the remainder of 2004.
OTHER MATTERS
Litigation
The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency (EPA) and certain state environmental
agencies and private parties as potentially responsible parties (PRPs) at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and equivalent state laws
and, as such, may presently be liable for the cost of clean-up and other
remedial activities at 41 such sites. Responsibility for clean-up and other
remedial activities at a Superfund site is typically shared among PRPs based on
an allocation formula.
Based on the information available to the Company, which in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large solvent public companies, will fully pay
the cost apportioned to them; currently available information from PRPs and/or
federal or state environmental agencies concerning the scope of contamination
and estimated remediation costs; remediation alternatives; estimated legal fees;
and other factors, the Company has established a reserve for indicated
environmental liabilities with a balance at June 30, 2004 of approximately $20.4
million. The Company expects this amount to be expended over the next three to
five years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality, the EPA and Kuhlman Electric to investigate the extent of and remediate
the contamination. The investigation revealed the presence of Polychlorinated
Biphenyls (PCBs) in portions of the soil at the plant and neighboring areas.
Clean up began in 2000 and is continuing. Kuhlman Electric and others,
including the Company, have been sued in numerous related lawsuits, which claim
personal injury and property damage. The first trial in these lawsuits is
scheduled to go to trial in August 2004.
The Company believes that the reserve for environmental liabilities and any
insurance recoveries are adequate to cover any potential liability associated
with environmental matters. However, due to the nature of environmental
remediation, there can be no assurance that the actual amount of environmental
liabilities will not exceed the amount reserved.
Stock Split/Dividends
On April 21, 2004, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 50,000,000 to 150,000,000. The approval
of the amendment allowed the Company to proceed with its previously
announced 2-for-1 stock split on May 17, 2004 to stockholders of record
on May 3, 2004.
On July 21, 2004, the Company declared a $0.125 per share dividend to be paid on
August 16, 2004 to stockholders of record as of August 2, 2004.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51", which was revised in December 2003. FIN No. 46
requires that the assets, liabilities and results of the activity of variable
interest entities be consolidated into the financial statements of the entity
that has the controlling financial interest. FIN No. 46 also provides the
framework for determining whether a variable interest entity should be
consolidated based on voting interest or significant financial support provided
to it. For the Company, this Interpretation, as revised, was effective January
1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46, therefore, there was no impact
on our Consolidated Financial Statements.
In December 2003, the FASB issued a revised Statement of Financial Accounting
Standards, (SFAS) No. 132, "Employer's Disclosures About Pensions and Other
Postretirement Benefits." SFAS No. 132 changes employers' disclosures about
pension plans and other postretirement benefits and requires additional
disclosures about assets, obligations, cash flows and net periodic benefit
cost.
The Statement is effective for annual and interim periods ended after December
15, 2003. The Company adopted SFAS No. 132 as of December 31, 2003, resulting
in additional disclosures in the Company's annual and interim Consolidated
Financial Statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
45 requires the Company to recognize an initial liability for fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN No.
45 on January 1, 2003 did not have ny impact on the Company's financial
position, operating results or liquidity and resulted in additional disclosures
in the Company's Consolidated Financial Statements.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) was enacted in the United States. The Act provides, among
other things, expanded existing Medicare healthcare benefits to include an
outpatient prescription drug benefit to Medicare eligible residents of the U.S.
(Medicare Part D) beginning in 2006. Prescription drug coverage will be
available to eligible individuals who enroll under the Part D plan. As an
alternative, employers may provide drug coverage at least "actuarially
equivalent to standard coverage" and receive-free federal subsidy equal to 28%
of a portion of a Medicare beneficiary's drug costs for covered retirees who do
not enroll in a Part D plan.
In May 2004, the FASB issued Staff Position FAS No. 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003," to provide guidance on accounting for effects of
the Act. The Staff Position requires treating the effect of the employer
subsidy on the accumulated post retirement benefit obligation (APBO) as an
actuarial gain. The effect of the subsidy is to be reflected in the estimate of
service cost in measuring the cost of benefits attributable to current service.
The effects of plan amendments adopted subsequent to the Act to qualify plans as
actuarially equivalent are to be treated as actuarial gains if the effect of the
amendments reduces the APBO. The net effect on the APBO of any plan amendments
that (a) reduce benefits under the plan and thus disqualify the benefits as
actuarially equivalent and (b) eliminate the subsidy are to be accounted for as
prior service cost.
The Company has deferred accounting for the effects of the Act pending an
assessment of the provisions of the Act on the Company's U.S.- based
postretirement healthcare plans; accordingly, the measures of the APBO and
expense recognized for the three months ended June 30, 2004 do not reflect any
amount associated with the subsidy. The Staff Position is effective for fiscal
periods beginning after June 15, 2004. The Company will record the effects of
the Act on the Company's U.S. based plans during the third quarter 2004.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from those
projected or implied in the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign vehicle production,
the continued use of outside suppliers, fluctuations in demand for vehicles
containing the Company's products, general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
There have been no material changes to our exposures to market risk since
December 31, 2003.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in ensuring that information required to be disclosed in reports that
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There have been no changes in internal
controls over financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to materially affect
our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various judicial and administrative proceedings which
are considered to be routine and incidental to its business including those
described in the MD&A under Other Matters Litigation. Management does not
believe that the results of any of these proceedings are likely to have a
material adverse effect on the Company's liquidity, financial condition or
results of operations.
Like many other industrial companies, the Company continues to be named as one
of the defendants in asbestos-related personal injury actions. Management
believes that the Company's involvement is limited to claims that relate to a
few types of automotive friction products, manufactured many years ago, that
contained encapsulated asbestos. The Company aggressively defends against these
lawsuits and has been successful in obtaining dismissal of many cases without
any payment whatsoever, or in many cases, for nominal or minimal settlement
payments. The Company has significant insurance coverage with solvent carriers
and, to date, has not incurred any out-of-pocket costs other than immaterial
administration expenses, in connection with these lawsuits or any settlements
thereof.
A declaratory judgment action was filed in January 2004 in the Circuit Court of
Cook County, Illinois by Continental Casualty Company and related companies
("CNA") against the Company and certain of its other historical general
liability insurers. CNA provided the Company with primary and excess insurance,
and, in conjunction with another primary insurer, is currently defending and
indemnifying the Company in all of its pending asbestos-related claims. The
lawsuit seeks to determine the extent of insurance coverage available to the
Company including whether the available limits exhaust on a "per occurrence" or
an aggregate basis, and to determine how the applicable coverage
responsibilities should be apportioned. In addition to the primary insurance
available for these claims, the Company has substantial historical excess and
umbrella insurance available for any anticipated asbestos-related liabilities.
Separately, the Company is in the process of negotiating a cost sharing
agreement among the first layer of excess insurers.
Although it is impossible to predict the outcome of pending or future claims, in
light of the nature of the products, our experience in defending and resolving
claims in the past, our insurance coverage and existing reserves, management
does not believe that asbestos-related claims will have a material adverse
effect on the Company's liquidity, financial condition or results of
operations.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Between May 20, 2004 and July 2, 2004, the Company issued an aggregate of 37,804
shares of common stock to employees who participated in the BorgWarner
Diversified Transmission Products Inc., Muncie Plant Local 287 Retirement
Investment Plan. Employees purchased the shares either through payroll
deductions or through intra-plan transfers into the company stock fund. The
aggregate amount of such purchases was approximately $1.5 million.
These issuances were not registered under the Securities Act of 1933, as
amended, due to an inadvertent failure to timely file a new registration
statement on Form S-8. The Company experienced an unforeseen dramatic increase
in purchases of the Company's common stock by employees through their benefit
plans after the Company completed a stock split in May 2004. The Company
immediately began the process of filing a new registration statement on Form S-8
(filed with the SEC on July 6, 2004) to register an additional 150,000 shares of
the Company's common stock, with the purpose and effect of ensuring that future
issuances would be registered. The Company believes that the aggregate amount
of any contingent claims for rescission or damages would not be material to its
financial condition.
Item 4. Submission of Matter to a Vote of Security Holders
On April 21, 2004, the Company held its annual meeting of stockholders. At such
meeting Jere A. Drummond, Timothy M. Manganello, and Ernest J. Novak, Jr. were
elected as directors to serve for a term expiring in 2007. Each of William E.
Butler, Paul E. Glaske, Phyllis O. Bonanno, Andrew F. Brimmer,
Alexis P. Michas,
and John Rau continued to serve as directors following the meeting. At such
meeting, the following votes were cast in the election of directors:
For Withheld
---------- ----------
Jere A. Drummond 22,633,176 529,170
Timothy M. Manganello 22,333,337 829,009
Ernest J. Novak, Jr. 22,567,029 595,317
At the annual meeting, stockholders also approved of the adoption of the
BorgWarner Inc. 2004 Stock Incentive Plan (the "Plan"). The following votes
were cast on the proposal to approve of the 2004 Plan:
For Against Abstain Not-Voted
18,263,597 2,333,402 130,527 2,434,820
At the annual meeting, stockholders approved of an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized shares of
common stock from 50,000,000 shares to 150,000,000 shares. The following votes
were cast on the proposal to amend the Restated Certificate of Incorporation:
For Against Abstain Not-Voted
15,718,223 7,347,002 97,121 0
At such meeting, the selection of Deloitte & Touche LLP as independent auditors
was approved by the following votes:
For Against Abstain Not-Voted
22,364,395 776,638 21,313 0
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Exhibit 3.1 Amendment to Restated Certificate of Incorporation
Exhibit 10.1 BorgWarner Inc. 2004 Stock Incentive Plan (incorporated by
reference to Appendix B of the Company's Proxy Statement
dated March 22, 2004 for its 2004 Annual Meeting of
Stockholders)
Exhibit 10.2 Ninth Amendment dated as of February 17, 2004 to Amended and
Restated Receivables Loan Agreement dated as of December 23,
1998
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive
Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial
Officer
Exhibit 32 Section 1350 Certifications
(b)Reports on Form 8-K
On April 5, 2004, the Company filed a report on Form 8-K, attaching a copy
of a press release announcing the appointment of Robin J. Adams to the
position of Executive Vice President, Chief Financial Officer and Chief
Administration Officer.
On April 7, 2004, the Company filed a report on Form 8-K announcing that,
in connection with Proposal 2 of the Company's 2004 proxy statement,
management decided to recommend to the Board of Directors that the number
of shares authorized to be granted as awards other than stock options and
SARs under the BorgWarner Inc. 2004 Stock Incentive Plan be limited to
400,000 shares.
On April 8, 2004, the Company filed a report on Form 8-K, furnishing a copy
of a news release relating to earnings expectations for the first quarter
of 2004 and full year 2004.
On April 22, 2004, the Company filed a report on Form 8-K, furnishing a
copy of a news release relating to its earnings for the first quarter of
2004.
On April 22, 2004, the Company filed a report on Form 8-K, attaching a
copy of a press release announcing that the stockholders of the
Company had approved an increase in the number of shares of authorized
common stock allowing for a two-for-one stock split and that the Board
had declared a quarterly dividend of $0.125 per share post-split
payable on May 17, 2004 to shareholders of record on May 3, 2004.
On April 22,2004 the Company filed a report on Form 8-K furnishing a
copy of a news release relating to it's earnings for the first quarter
of 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORGWARNER INC.
(Registrant)
By:/s/ William C. Cline
WILLIAM C. CLINE
Vice President and Controller
(Principal Accounting Officer)
Date: August 11, 2004